Mortgage Terms Glossary
Mortgage paperwork runs on a vocabulary nobody uses anywhere else. This glossary defines the terms that actually appear on a Loan Estimate, in underwriting, and at closing, in two or three plain sentences each. For the numbers behind them, the free mortgage calculator shows how a payment breaks apart.
How to use this page: every term has its own anchor, so a link to a single definition works. Terms that carry real depth link out to the guide that covers them properly rather than repeating a shortened version here.
Jump to: A C D E F H J L M O P R S T U
A
Adjustable-rate mortgage (ARM)
An ARM carries one interest rate for an introductory period, then adjusts on a set schedule against a published index plus a fixed margin. Caps limit how far the rate can move at each adjustment and across the life of the loan. The payment is fixed only until the first adjustment, so the later payments are a range rather than a number.
Amortization
Amortization is the process of paying a loan down to zero in level payments, each one split between interest on the balance you still owe and principal that reduces it. Early payments are mostly interest because the balance is largest then, and the mix shifts toward principal over time. The full month-by-month split is the amortization schedule.
Annual percentage rate (APR)
APR expresses the cost of a loan as a yearly rate that folds in the interest rate plus certain lender fees and prepaid finance charges. It is usually higher than the note rate on the same loan. It exists so two offers with different fee structures can be compared on one number.
Appraisal
An appraisal is an independent opinion of a property's market value, ordered by the lender and paid for by the borrower in most purchase transactions. Lenders use it to confirm the property is worth enough to secure the loan. If the appraised value comes in below the contract price, the lender sizes the loan against the lower figure.
C
Closing costs
Closing costs are the one-time charges settled at closing, covering lender fees, third-party services, government recording charges, and the prepaid items that seed an escrow account. They are separate from the down payment and are itemized on the Loan Estimate and Closing Disclosure. The components and a worked illustration are covered in the guide to closing costs.
Closing Disclosure
The Closing Disclosure is the five-page form that states the final terms and costs of the loan. Lenders are required to deliver it at least three business days before closing so the figures can be compared against the earlier Loan Estimate. Differences between the two documents are worth raising with the lender before signing.
Conforming loan
A conforming loan meets the size limits and underwriting standards set for purchase by the government-sponsored enterprises that buy mortgages on the secondary market. Because those loans are easy for lenders to sell, conforming borrowers usually see a wider set of offers. Loans above the size limit are jumbo loans instead.
D
Debt-to-income ratio (DTI)
DTI compares total monthly debt payments to gross monthly income, expressed as a percentage. Lenders read it as a measure of how much room a budget has left after existing obligations, and many use the 28/36 guideline as a starting reference rather than a rule. Affordability, including how DTI limits a purchase price, is covered on the affordability page.
Deed
A deed is the legal instrument that transfers ownership of real property from one party to another. It is recorded in the county land records so the chain of ownership is public. A deed is distinct from the mortgage, which is the document pledging the property as security for the loan.
Discount points
A discount point is a fee equal to 1% of the loan amount, paid at closing in exchange for a lower interest rate for the life of the loan. Whether it is worth paying depends on how long the loan is held, because the up-front cost is recovered only through accumulated monthly savings. The break-even math is worked through on the discount points page.
Down payment
The down payment is the share of the purchase price paid in cash rather than borrowed. It sets the loan amount directly, so it drives both the monthly payment and the total interest. How different down payment sizes change those figures is compared on the down payment page.
E
Earnest money
Earnest money is a deposit made when a purchase contract is signed, held by a third party to show the offer is serious. At closing it is generally credited toward the down payment or closing costs. Whether it is refundable if the deal falls apart depends on the contingencies written into the contract.
Equity
Equity is the difference between what a property is worth and what is still owed against it. It grows two ways: through principal payments that shrink the balance, and through changes in the property's market value. Equity is what home equity loans, HELOCs, and cash-out refinances borrow against.
Escrow
Escrow has two meanings in a mortgage. During the transaction it is the neutral third-party account that holds funds and documents until closing conditions are met. After closing it is the account the servicer uses to collect property taxes and insurance premiums monthly and pay those bills when they come due.
F
Fixed-rate mortgage
A fixed-rate mortgage keeps the same interest rate for the entire term, so the principal and interest portion of the payment never changes. Taxes, insurance, and mortgage insurance can still move the total payment. The predictability is the product: the loan is immune to later rate moves in both directions.
H
Home equity line of credit (HELOC)
A HELOC is a revolving credit line secured by the equity in a home, usually with a draw period followed by a repayment period. Rates are typically variable, so payments can change over time. Because the home secures the line, missed payments carry the same category of risk as a first mortgage.
Homeowners insurance
Homeowners insurance covers damage to the property and certain liability claims, and lenders require it for as long as the loan exists. The premium is often collected monthly through escrow rather than billed annually. It is separate from mortgage insurance, which protects the lender rather than the owner.
J
Jumbo loan
A jumbo loan exceeds the conforming size limit, so it cannot be sold to the government-sponsored enterprises and is held or securitized privately. Underwriting is generally stricter on credit, reserves, and documentation. Pricing can be higher or lower than conforming depending on the lender and the moment.
L
Lien
A lien is a legal claim against a property that secures a debt. A mortgage creates a voluntary lien in favor of the lender; unpaid taxes or contractor bills can create involuntary ones. Lien position determines who gets paid first if the property is sold or foreclosed, which is why lenders insist on being first.
Loan Estimate
The Loan Estimate is the standardized three-page form a lender provides after a mortgage application, showing the estimated rate, monthly payment, and closing costs. Because the layout is identical across lenders, two estimates can be compared line by line. How to read one is covered on the closing costs page.
Loan-to-value ratio (LTV)
LTV is the loan amount divided by the property value, expressed as a percentage. A 20% down payment produces an 80% LTV. Lenders price risk against it, and it is the threshold that governs private mortgage insurance on conventional loans.
M
Mortgage insurance
Mortgage insurance protects the lender against loss if a borrower defaults, and it is generally required when the down payment is small. On conventional loans it is called private mortgage insurance; government-backed programs have their own equivalents with different rules. The borrower pays the premium, and the lender holds the protection.
O
Origination fee
An origination fee is what a lender charges to process, underwrite, and fund a loan, usually quoted as a percentage of the loan amount. It appears in the lender section of the Loan Estimate alongside any underwriting or processing charges. Origination charges are one of the components lenders can compete on.
P
PITI
PITI stands for principal, interest, taxes, and insurance, the four parts of a typical monthly housing payment. Only principal and interest go to the loan itself; taxes and insurance usually flow through an escrow account. Mortgage insurance and homeowners association dues sit on top of PITI where they apply.
Preapproval
A preapproval is a lender's conditional statement of how much it is prepared to lend, based on documentation it has reviewed. It is stronger than a prequalification, which relies on figures the borrower states. Sellers often treat a preapproval letter as evidence that an offer can actually close.
Prepayment penalty
A prepayment penalty is a fee charged for paying a loan off, or paying it down substantially, ahead of schedule. They are uncommon on current owner-occupied mortgages and restricted by regulation, but the loan documents are the place to confirm. The clause matters most to anyone planning an early refinance or sale.
Principal
Principal is the amount actually borrowed, and later the balance that remains. Interest is charged on the outstanding principal, so every dollar of principal removed stops accruing interest for the rest of the term. That is the mechanism behind every extra-payment strategy.
Private mortgage insurance (PMI)
PMI is the mortgage insurance carried on conventional loans when the down payment is under 20%. Annual premiums generally run about 0.3% to 1.5% of the loan amount, and PMI can be removed once the loan reaches the required equity threshold. The full rules on cost and cancellation are on the PMI page.
R
Rate lock
A rate lock is a lender's commitment to hold a quoted interest rate for a set number of days while the loan is processed. Longer locks generally cost more, and a lock that expires before closing may need to be extended for a fee. A lock protects against rate increases and also forfeits the benefit of decreases unless the lock has a float-down provision.
Recast
A recast re-amortizes an existing loan over its remaining term after a large principal payment, lowering the required monthly payment without changing the rate or the payoff date. Not every servicer offers it, and those that do usually charge a small fee and require a minimum lump sum. It differs from a refinance because the original loan stays in place.
Refinance
A refinance replaces an existing mortgage with a new one, typically to lower the rate, change the term, or convert equity into cash. It carries its own closing costs, so the saving has to accumulate long enough to cover them. That calculation is worked through on the refinance break-even page.
S
Servicer
The servicer is the company that collects payments, manages the escrow account, and handles statements and payoff quotes. It is often not the lender that originated the loan, and servicing can be transferred during the life of the loan. The loan terms do not change when a servicer changes.
T
Title insurance
Title insurance protects against losses from defects in the ownership record, such as an undisclosed lien, a recording error, or a competing claim. The lender's policy is required and covers the loan balance; a separate owner's policy covers the buyer's own interest. Both are one-time premiums paid at closing rather than recurring charges.
U
Underwriting
Underwriting is the lender's review of whether the borrower and the property meet the loan program's requirements. It examines income, assets, credit, the appraisal, and the title work, and it usually generates conditions that have to be cleared before closing. Approval is the end of underwriting, not the beginning.
Where these terms show up
Most of this vocabulary arrives in three waves. Shopping produces rate, term, points, and the Loan Estimate. Underwriting produces appraisal, title work, conditions, and the rate lock. Closing produces the Closing Disclosure, the deed, the recording charges, and the first escrow setup. The words are the same across lenders because the forms are standardized, which is what makes comparing two offers possible at all.
The figures behind the words are easier to hold onto once they are attached to a number. The mortgage calculator takes a price, a down payment, a rate, and a term, and shows the payment split into principal, interest, taxes, insurance, and mortgage insurance, so terms like amortization and PITI stop being abstract.
Frequently asked questions
What is the difference between principal and interest?
Principal is the amount borrowed and still owed; interest is the charge for owing it. Every scheduled payment covers the interest for that month first, and whatever is left reduces the principal. As the principal falls, the interest portion of each payment falls with it.
What does escrow mean on a mortgage?
Escrow means two different things. Before closing it is the neutral account that holds funds and documents until the conditions of the sale are met. After closing it is the account the servicer uses to collect property taxes and insurance monthly and pay those bills when they come due.
Is a Loan Estimate the same as a Closing Disclosure?
No. The Loan Estimate is the three-page form issued after application with estimated terms and costs. The Closing Disclosure is the five-page form issued before closing with the final figures, and it is designed to be compared against the earlier estimate.
What is the difference between LTV and DTI?
LTV compares the loan to the value of the property, so it measures the collateral. DTI compares monthly debt payments to gross monthly income, so it measures the budget. Lenders look at both because they answer different questions.
More mortgage guides
- Closing costs explained
- How much to put down
- How much is PMI, and how do I remove it?
- What's in a mortgage payment? (PITI, PMI & HOA)
- Mortgage calculator FAQ
This guide is general information, not financial advice. Rates and figures vary. Confirm all numbers with your lender.
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